How to Get a Home Loan

How to Get a Home Loan

To borrow money, you'll need to apply for a loan. Home loans require much more documentation than other types of loans (like auto loans or personal loans), so be prepared for a long process.

Credit and Income:

As with most loans, your credit and income are the primary factors that determine whether or not you'll get approved. Before you apply for a home loan, check your credit to see if there are any issues that might cause problems (and fix them if they're just errors). Late payments, judgments, and other issues can result in getting your application denied ? or you'll get a higher interest rate, which means you'll pay more over the life of your loan.

Documentation and Ratios:

Lenders are required to verify that you have enough income to repay any loans that they approve. As a result, you'll need to provide proof of income (get your Form W-2, your most recent tax return, and other documents handy so that you can submit them to your lender).

Debt to Income Ratio:

Lenders will look at your existing debts to make sure you have sufficient income to pay off all of your loans ? including the new one you're applying for. To do so, they calculate a debt to income ratio, which tells them how much of your monthly income gets eaten up by monthly payments.

Loan to Value Ratio:

Although it's possible to buy with very little down, your chances of getting approved are better when you make a large down payment. Lenders calculate a loan to value ratio, which shows how much you're borrowing compared to how much the property is worth. The less you borrow, the lower the risk for your lender (because they can quickly sell the property and recover all of their money).

Preapproval:

It's best to know how much you can borrow long before you start shopping for houses (or loans). One way to do that is to get preapproved by a lender. This is a preliminary process where lenders evaluate your credit information and your income. With that information, they can give you a maximum loan amount that they're likely to approve. This doesn't necessarily mean that you're approved ? especially not for a particular property ? but it is helpful information, and a preapproval letter can help strengthen your offer. Once you're under contract, lenders will take a closer look at everything and issue an official approval (or rejection).

How Much to Borrow:

Lenders always tell you how much you can borrow, but they don't discuss how much you "should" borrow. The responsibility falls on you to decide how much to spend on a house, what type of loan to use, and how large of a down payment you want to make (affecting your loan to value ratio). All of those factors determine how much you'll pay every month, and how much interest you'll pay over the life of your loan (smaller loans lead to smaller monthly payments and smaller interest charges). It's risky to borrow the maximum amount available, especially if you prefer to have some "cushion" in your monthly budget.

Where to Borrow

Home loans are available from several different sources. Get quotes from at least three different lenders, and pick the one that works best for you.

Mortgage brokers offer loans from numerous lenders. They have access to loans from multiple banks and other sources of financing, and they will help you select a lender based on the interest rate and other features. Mortgage brokers might charge an origination fee that you pay, or they might get paid by the lender (or a combination of both). If you don't know any mortgage brokers, ask your real estate agent or other people you trust for a recommendation.

Banks and credit unions offer loans to customers. The money in checking and savings accounts needs to be invested, and lending that money out is one way to invest that money. These institutions also earn revenue from origination fees, interest, and other closing costs.

Online lenders can fund loans themselves (using investor money, for example), or they can function as mortgage brokers. These services are convenient because you can handle everything virtually, and you can often get quotes more or less instantly.

Each lender should provide you with a Loan Estimate, which helps you compare the cost of borrowing from different lenders. Read through these documents carefully, and ask questions until you understand everything you see. The CFPB explains several sections of the Loan Estimate to help you understand the features of your loan.

Loan Programs

It may be possible to get help with your loan using loan programs from government and local organizations. These programs make it easier to get approved, and some offer creative incentives to make home ownership more affordable and attractive. In addition to buying a house, it may be possible tor refinance with these programs (even if you owe more than your home is worth).

Government loan programs are among the most generous. In most cases, a private lender (like a bank) provides funding, and the federal government promises to repay the loan if you fail to do so. There are a variety of programs, and some of the most popular ones are listed below.

FHA Loans:

Loans insured by the Federal Housing Administration (FHA) are popular for homebuyers who want to make a small down payment. It's possible to buy with as little as 3.5 percent down, and they're relatively easy to qualify for (if you don't have perfect credit, for example). Learn more about FHA loans.

VA Loans:

Veterans, Servicemembers, and eligible spouses can buy a home with a loan guaranteed by the Department of Veterans Affairs (VA). These loans allow you to borrow with no requirement for mortgage insurance and no down payment (in some cases). You can borrow with less-than-perfect credit, closing costs are limited, and the loan may be assumable (allowing somebody else to take over the payments if they're eligible).

First-Time Homebuyer programs make it easy to own your first home, but they come with strings attached. Often developed by local governments and nonprofit organizations, these programs can help with down payments, approval, interest rates, and more. However, they are hard to find (and qualify for), and they may limit how much you can profit when you sell your home.